Decentralized finance has enormous potential for offering alternative financial services and products to the most marginalized segments of society. However, decentralized financing is still subject to mandatory overcollateralization. Through its Open Protocol, Hashstack seeks to alter that narrative for the better.
Increasing Access to Decentralized Lending
The prospect of obtaining a loan using bitcoins is extremely enticing to DeFi aficionados. The majority of these loans are authorized automatically, provided that the borrower has the required collateral. That is where things get dicey, as decentralized finance’s existing collateralization requirements are quite high. More precisely, consumers will nearly always be required to provide collateral in excess of the amount borrowed.
Despite the popularity of Liquity, Compound, and MakerDAO, these collateral requirements have not been significantly reduced. It is not uncommon for lenders to want collateral equal to 150 percent of the loan amount, or even more in rare situations. Rates of high to 300 percent have also existed, offering a larger cushion for users providing liquidity to extend loans but making it practically difficult for people to become excited about decentralized lending.
Collateral requirements in their current form are analogous to attempting to borrow $50,000 from a bank and providing a $75,000 guarantee. This is not enticing. Furthermore, if such a guarantee or collateral is available, there is no reason to seek a loan in a lesser amount. Collateralization requirements reduction is critical for the DeFi business. Thankfully, Hashstack Finance and its Open Protocol give the much-needed alternative.
Uncollateralized Loans Are On Their Way
The primary selling point of Hashstack’s Open Protocol is the inclusion of uncollateralized loans. More precisely, DeFi users can reach a collateral-to-loan ratio of up to 1:3, opening up a plethora of fascinating possibilities. As with other lending solutions, the protocol is self-contained and will enable users to borrow money with significantly reduced collateral requirements. For instance, customers can borrow up to $300 with a $100 down payment. Additionally, up to 70% of the collateral may be withdrawn while the remaining balance is used for in-platform trading. Instant access to loans will accelerate the expansion and appeal of decentralized finance.
Vinay, the founder of Hashstack Finance, adds:
“Today, in order to borrow $100 on Compound, Aave, or even MakerDAO, you must give at least $142 in collateral. This defeats the basic purpose of loan procurement and imposes restrictions on the borrower’s use-cases. In instance, using Hashstack’s Open protocol, you might borrow the same $100 with as low as $33.33 in collateral. This 4.25x value-add above established market players represents a watershed moment for the defi ecosystem as a whole and will accelerate adoption.”
Additionally, Hashstack is interoperable with current and future DeFi systems, such as Pancakeswap. As an added bonus, users can explore in-app swaps to change borrowed tokens into currencies from the same ecosystem. At the time of writing, Open Protocol supports the Binance Smart Chain, Ethereum, and Avalanche C-chain assets.
Open Protocol is already live on the testnet and will be released in its entirety in the coming weeks. During the protocol’s initial phase, it will accept liquid currencies such as Bitcoin, USDT, USDC, Binance Coin, and Hashstack’s governance token HASH. Support for other currencies will be phased in over time.
Final Thoughts
Decentralized finance offers potential, particularly when it comes to lending and borrowing. Forcing customers to put up more collateral than they can borrow, on the other hand, is unappealing to the majority of individuals. Rather than that, the change to uncollateralized loans is necessary. Loans should be available to individuals who have little or no cryptocurrency, and Hashstack Finance has cracked that code.
Eliminating market inefficiencies is a critical first step toward increasing worldwide DeFi adoption. Catering to established crypto aficionados, on the other hand, is not the way to go in this market. Undercollateralized loans have the potential to be a significant catalyst for increasing public interest in the cryptocurrency business and, by extension, decentralized finance.
This content is provided solely for informational reasons. It is not meant to serve as legal, tax, investment, financial, or other professional advice.
